SMALL CAP IDEAS: Turnaround process has made project management firm WYG into a highly focused, growing business

Borrowing the closing line from Sesame Street, today’s article is brought to you by the letters WYG and the numbers 15, 18 and 25.

WYG Plc is the name of the global project management and technical consultancy that has big growth plans over the next three years.

The numbers provide a benchmark for that growth: it wants to treble profits to £15million by 2018; and it recently secured a £25million credit facility with HSBC to fund organic expansion and infill acquisitions where it needs to buy in expertise.

The strategy was mapped out earlier this year, but in an attempt to stress test its plans it decided to ask potential buyers of the business whether they could deliver better value.

Not Sesame Street: WYG is the name of the global project management and technical consultancy that has big growth plans over the next three year

In fact it could have been terminal for chief executive Paul Hamer and his team had the putative buyers of WYG come back with a master plan that bettered the management blueprint already on the table.

They didn’t and in fact the WYG top team had a parallel process, called Plan A.

It involved strengthening the board, implementing a new incentive scheme to reduce shareholder dilution and securing the funds required to get the business to its 2018 target.

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CEO Hamer got onto the WYG 'roller coaster' (his words not mine) back in 2009 when it was on a downhill leg.

By 2011 he put in place a recovery plan that will be completed with all the financial and operational boxes ticked by March next year.

The one thing that didn’t really respond in the way it should have was the share price.

Holding the stock back was what Hamer describes as an 'extraordinary private equity-style' incentive programme that would have given management around 25 per cent of the company, leading to significant dilution of shareholders.

It is telling that the stock has nudged around 20 per cent higher since investors voted to replace the old scheme with a 'public market-compliant' alternative that would see the top team earn something closer to 4 per cent of WYG.

Analysts expect the stock to continue in this vein even against the rather uncertain backdrop of the wider market.

Delving under the bonnet of the business, WYG here in the UK is a leader in planning, environment and transport that works as a trusted advisor to businesses and organisations.

Hamer says the company provides a 'truly differentiated service' rather than a commoditised product.

This is reflected in the margins it garners that tend to be double if not triple those achieved by the engineers further along the supply chain.

In Europe, the company does a lot of EU-funded work. It’s an area where project delays are expected to give way to a significant up-tick in business as the latest spending round gets into full swing.

'I use the word brave in the same way as Sir Humphrey Appleby did when haggling with Jim Hacker, the fictional politician in the Yes Minister and Yes Prime Minister series. So for brave – read potentially foolish.'

Outside that WYG works hand-in-glove with the British Government on projects in politically fragile emerging countries.

While the UK will provide the firm with some very steady growth opportunities, the international operation is expected to be at the vanguard of expansion.

Notionally, around £15million has been set aside for acquisitions to augment the organic potential of the business.

It will be used to bring in the expertise or to catapult it up the rankings for important disciplines where it currently might not be a top tier performer.

The remainder has been set aside to provide financial bonds that will then allow the company receive a 20 per cent down-payment on any work it carries out for the EU.

It means these EU contracts will be immediately cash generative.

Financially it is a solid business with first half adjusted profits rising 13 per cent in the six months to September 30 to £2.1million on revenues that were steady year on year at £63million.

The order book stood at around £123million, while WYG had cash in the bank of £2.6million. It paid an interim dividend of 0.5p, up two thirds from the same point last year.

Broker WH Ireland is predicting the company will post sales of £135million for the full year, giving adjusted profits of £7million, rising to £9.2million by for the year ended March 2017.

There is a disconnect between the £15million of profits being predicted by the company by year-end 2018 and the rather more conservative numbers being quoted by the market.

As the company hits its targets and brings in the acquisitions it has planned, so that gap will narrow.

WHI analyst Nick Spoliar reckons the shares are currently trading at a 20 per cent discount to the broader support services sector.

He reckons the stock is worth 172.5p – around 33 per cent higher than the current share price.

'Having been, two or three years ago, through a turnaround process which was strongly and professionally managed, WYG is a growing and highly focused business,' Spoliar said.